Inflation concerns have been a headline lately. I wrote a post on the matter a few months ago, The Fears of Inflation, but I thought this would be a good time to revisit the subject.
There are quite a few people saying that we’re going to get hyperinflation, or very high or out-of-control inflation. I think we may get some above average inflation in the future, but nothing close to what most people would consider hyperinflation. Now that’s just my humble opinion.
There is this whole talk about how the Federal Reserve has been expanding the monetary base (or money supply) to “unprecedented” levels and how we’re going to get tons of inflation. In general, holding everything else constant, excessively expanding the monetary base would create inflation.
Link: http://research.stlouisfed.org/fred2/series/BOGAMBNS?cid=124
However, what most people do when analyzing this graph is to forget that other things have also changed to “unprecedented” levels. It can be that other things have changed to such “unprecedented” levels that it offsets the increase in the monetary base.
Looking at the graph above, we can roughly say that the spike in the monetary base is equal to around $1 trillion. The question is, has there been any cash withheld in the economy that offsets this this spike?
Link: http://research.stlouisfed.org/fred2/graph/?s[1][id]=EXCRESNS
The graph above shows that the level of excess reserves have reached “unprecedented levels” and gone from near-zero to $850 billion. That would leave a net increase of only $150 billion in money circulating in the economy. However, what happens when you add all the non-depository institutions that are hoarding cash?
Some people claim that the Federal Reserve won’t be able to withdraw the money it is creating when this money seating on the sideline returns. The Fed may not be able to do a 1-for-1 perfect withdrawal job, however, it is unlikely that it will mess up to a point where we will get 15% or 30% inflation.
The second point at hand and something that has been all over the media is rising yields on the 10-year Treasury note. Interest rates on Treasuries move for many reasons yet there are some that are quick to say that the rising rates is due to the market’s expectation of future inflation.
As of the market close today, 10-year Treasuries had a yield of 3.72%.
Interesting. The spike back to around 4% is more like a reversal to a more natural rate. Therefore, how do the hyperinflation supporters claim that the “rising” interest rates are a sign that we’re going to get out of control inflation? Additionally, it is me or it seems that on a relative basis 4% is actually a pretty natural if not lower number than than historical levels?
Zooming in to a 2 year period, this is what we get:
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